At Installment Sale Reality, we understand that the tax implications of selling your business or real estate investment can be confusing. That’s why our expert team wrote this article to fully explain the benefits of installment sales and how they compare to the section 1031 exchange. We also explain why we recommend installment sales and their benefits over section 1031. Keep reading to learn more.
1031 exchange and installment sales explained
Taxes come in many forms, and capital gains taxes are some that many people forget about. But did you know that you have to pay these taxes on any business, real estate investment, or property at the time of sale if their values have appreciated? It’s true. Fortunately, tax strategies are available to mitigate some of these capital gains taxes to keep more money in your pocket.
Section 1031 has been around for over 100 years. But recently, it is getting an overhaul. It has historically been used by real estate developers and investors after a sale of a property to defer capital tax gains. But what these overhauls mean for the 1031 exchange and its tax implications is still unknown.
Installment sales offer an alternative to the 1031 exchange. They usually involve seller-carried financing after the sale of real estate or a business. While the seller still holds the promissory note, they can defer tax liabilities in proportion to the installment they receive in a given year.
In most cases, both the buyer and the seller benefit from an installment sale. The buyer ends up with the property they want and the seller won’t have to pay capital gains taxes immediately. Instead, the seller can spread the tax payments out over years.
But what does it mean when the seller still holds the promissory note? Essentially, it is an obligation of debt. Though there is some risk to the party holding the promissory note, in 1980, the Installment Sale Revision Act set protections for the seller. Essentially, this intervention eliminates taxation if the buyer defaults. Recent legislation has continued to make installment sales a safe choice for both the seller and buyer.
Why an installment sale often makes a superior choice
A structured installment sale allows the seller to liquidate their assets gradually. Selling assets in relation to business and tax cycles can help you maximize your returns. Best of all, an installment sale can hold multiple purposes, including:
- Closing a business
- Selling real estate that isn’t your primary residence
- Selling realty investments
- Liquidating capital investments that have appreciated
When it comes to the 1031 exchange, the unsure nature of the legislation makes us hesitant to suggest it. In fact, we don’t even provide that option at our firm. Most likely, the new legislation will take people who choose the 1031 exchange to a higher capital gains tax rate in the future.
But the new legislation won’t affect installment sales, and that is a significant reason we suggest it over the 1031. When you choose installment sale structuring with our installment sale company, you can defer your capital gains taxes while you reinvest the capital across other assets.
Why choose Installment Sale Reality for your installment sale
We help business owners, real estate developers, and investors keep more money in their pockets by increasing the net value of the sales proceeds while deferring capital gains taxes.
For this to work, your installment sale must have appropriate structuring. That’s where our installment sale company comes in. At Installment Sale Reality, we are qualified administrators of installment sales. It takes years of experience to fully understand how to structure the sale to receive maximum benefits. We have that experience and want to assist you with your installment sale today.
Ready to find out if an installment sale is the right capital gain tax mitigation strategy for you? Call our installment sale company to schedule your no-obligation consultation today. Installment Sale Reality serves clients across the United States, so contact us today!